The Federal Reserve has raised short-term interest rates at a quickening pace since the financial crisis and has signaled that more increases are in the works. Plaintiffs considering a structured settlement may be concerned they will miss future higher investment returns on their settlement funds as the result of increasingly higher interest rates if they lock in a structured annuity today.

Fortunately, there are creative solutions so that current structured annuity payments can be adjusted upwards over time to account for market or inflation increases or if claimants know certain life milestones will require additional funds in the future.

Stepped Annuities

Stepped annuities involve increases in structured settlement payments for a fixed period or over the lifetime of the settlement payments. In one case, a 40-year-old teacher was rear-ended in a car crash and suffered a severe back injury that made it impossible for him to return to the classroom. The negotiated settlement between the plaintiff and the defendant’s insurance company was $2 million. A stepped payment plan was created to compensate for loss of earnings throughout the claimant’s life and for inevitable increases in the cost of living.

The structured plan was designed for the claimant to receive monthly payments guaranteed for 20 years, with an initial monthly payment of $3,000. This amount would increase by $1,000 per month every five years (at age 45 and 50) until he reaches age 55. At 55, a life-only annuity would begin, paying him $6,000 a month for the rest of his life.

Instead of buying one annuity that would pay a fixed amount over its lifetime, additional annuities are purchased and are scheduled to begin paying at future dates. In addition, if the claimant knows that a new car, cost for college or some other large expense is in his future, he has the option to arrange for additional payments in certain years to cover these costs.

Tied to S&P 500

A relatively new annuity product from Pacific Life is tied to increases in the stock market. When the S&P 500 Index rises over a 12-month period, payments from a structure with a Pac Life S&P 500 Index-Linked rider are recalculated and can increase by an annual maximum of 5 percent. When the S&P 500 Index has a negative or zero return, however, there is no reduction in the payment amount.

For example, a 35-year-old injured man decided to use this type of annuity in his structured settlement. Payments began at $3,000 per month for life with a 20-year guarantee. Since the annuity contains an S&P 500 Index-Linked rider, monthly income would increase from 1 percent to 5 percent the following year depending on the growth of the index. For example, if the S&P Index grew by 2 percent, the $3,000 monthly payment would also increase by 2 percent the following year to $3,060 per month. If in year three, the S&P Index grew by 4 percent the monthly amount would increase by 4 percent for the next 12 months. If in any given year the S&P Index does not increase or has a negative return, the monthly income is not affected and will remain the same for the next 12 months.

Having an annuity that increases as the S&P 500 Index increases is a way for the claimant to keep payments on par with the returns enjoyed by investors in a rising stock market environment but without the downside risk.

Inflation-Adjusted Annuities

Another option to consider for an injured client is inflation-adjusted annuities. Inflation-adjusted annuities will ensure payments keep up with rising inflation by increasing each year by the selected inflation percent (i.e., 1 percent, 2 percent or 3 percent).

For example, a 24-year-old college student was struck at a crosswalk by a truck. She suffered a broken neck and fractured hip. Due to her extensive injuries she is now a complete quadriplegic. Her case settled for $6.5 million. An annuity plan with an inflation component was set-up for her where she would begin receiving monthly payments of $5,000 for life with a 20-year guarantee. She selected a 2 percent annual increase for the lifetime of the annuity.

In another example, Joe, age 21, was driving a forklift when he lost control of the vehicle. He attempted to jump out of the way of the forklift, but was pinned. His lower extremities were crushed and both legs were amputated after the incident.

His case settled for $5 million. Joe is receiving $3,000 per month guaranteed for 20 years. He will also receive lump sums of $100,000 every five years for the next 30 years.

Factoring in A Structure’s Tax-Free Status

When the structured settlement is derived for a physical injury or workers’ comp claim, the plaintiff receives money from the payout tax-free. It does not matter if the injured party receives all the proceeds immediately or in later years. The tax-free status of payments from the qualified structured settlements for physically injured parties was codified in the Periodic Payment Settlement Act of 1982 (Public Law 97-473).

This means the real return on a structured settlement annuity is similar to a comparable taxable investment. This is particularly true in states such as California where state income taxes are high. Another added advantage: the funds in the annuity compound tax-free.

In the case of the injured college student who was struck in the crosswalk, the internal rate of return is 3.25 percent, which would be equivalent to a taxable rate of 4.5 percent.

For the injured forklift driver, his benefits grow at an internal rate of return of 3.34 percent annually, which would be an equivalent rate of 4.55 percent if taxed.

While structured settlements give injured plaintiffs guaranteed income for 10, 20, 30 years or more, it is up to the plaintiffs legal counsel and structured settlement broker to design an annuity payment plan that will be sufficient for a secure financial future.

During a lifetime, markets will inevitably fluctuate, interest rates will rise and fall and inflation will always be a factor. Including a component within the structure to account for inflation and market fluctuations can provide peace of mind regardless of economic conditions.

Patrick Farber is a structured settlements broker with Atlas Settlement Group based in Santa Ana, California. He works with attorneys nationally to create structured settlement annuities for physical and non-physical injury cases. He provides support and advice during all phases of the settlement process, and can be reached at 800-734-3910, pat@patfarber.com.

]]>http://patrickfarber.com/structured-settlements/increases-interest-rates-can-factored-structured-settlements/feed/0Structured Settlements For Older Clientshttp://patrickfarber.com/all/structured-settlements-older-clients/
http://patrickfarber.com/all/structured-settlements-older-clients/#respondWed, 29 Nov 2017 21:37:41 +0000http://patrickfarber.com/?p=6155Structured settlements are often created for injured individuals who must make their settlement payout last for the rest of their lives—sometimes 30, 40 or 50 years. They want to be sure they will not outlive their money. But what happens when claimants are injured in their 60s, 70s or beyond? Do structured settlements still make sense? In many cases, yes.

Working Seniors

For employed seniors, a life altering injury can greatly impact their retirement savings. An injured 60 year old who had counted on adding to his retirement fund for another six or seven years but now finds he can no longer work, can rely on regularly scheduled, guaranteed payouts from a structured settlement to help cover expenses.

Structured Settlements As Part of A Tax Strategy

Money grows tax-deferred within a retirement account but is taxed once withdrawn. Settlement payments for physical injuries are always tax exempt. By receiving structured payouts, claimants may be able to delay withdrawing funds from a retirement account–so the money grows tax-deferred longer.

Estate Planning

Once claimants pass away, the remaining structured payments become part of their estate. Through a living trust, a claimant can determine ahead of time how those funds will be distributed.

Maintaining Government Benefits

If settlement proceeds are paid through a Special Needs Trust, the injured party can still be eligible for government benefits.
Structured settlement recipients can also be creative in how they use their funds—to pay for grandchildren’s college education, lump sum payouts to adult children or to cover the high cost of assisted living.

The financial needs of every individual is unique. In some cases, a structured settlement may not be appropriate. Before any decision is made, the claimant should discuss options with his or her accountant and an estate-planning attorney.

When a case resolves, attorneys have a decision to make:what to do with the fees owed to them.

Successfully negotiating a settlement or winning a case on behalf of an injured client is one of the most satisfying aspects of the legal profession. While savoring the victory, attorneys have a decision [...]]]>

When a case resolves, attorneys have a decision to make:what to do with the fees owed to them.

Successfully negotiating a settlement or winning a case on behalf of an injured client is one of the most satisfying aspects of the legal profession. While savoring the victory, attorneys have a decision to make: what to do with the fees owed them.

Attorneys can choose from a number of options. They can place the proceeds in the bank; in an investment or retirement account; or they can use the money immediately to pay firm expenses.

The downside is when an attorney takes receipt of the funds, at which point the money become fully taxable—potentially wiping out 30 to 40 percent of income.

THE CASE FOR ATTORNEY FEE STRUCTURES

One way to avoid the upfront tax bite is to structure some or all of the fees. Structuring attorney fees is similar to structuring a personal injury client’s damage settlement. Fees are placed in an annuity and an assignment company makes payments from the annuity per an agreed upon schedule. The major difference between the two is that payments to clients are tax-free while payments to attorneys are tax deferred.

By spreading fees over a number of years through fee structuring, a tax strategy can be devised to better manage a practice’s income while minimizing taxes. As an added bonus, money in the annuity grows tax-free until withdrawn.

HYPOTHETICAL CASE

Assume, for example, a 45-year-old sole practitioner wins a big personal injury case that generates a $500,000 fee. She decides to spread the payments over five years via an annuity. Since money grows in the annuity tax free, she would receive $102,521 annually for five years for a total amount of $512,605.

If that same attorney decides that she prefers a steady income stream over a longer time frame, she can choose to receive that same $500,000 fee in monthly payouts. In such a case, the amount calculated per month would be $2,115 for life with a 20-year guarantee ($507,619) with the total expected lifetime benefit of $894,678. The internal rate of return would 2.35 percent.

SOME LIMITATIONS

Not all cases qualify for fee structuring.

Contingency fee cases, where payment is made from a settlement or award, qualify. Cases in which attorneys are paid throughout the course of the case do not. Attorney’s fees can be structured for primarily personal injury and workers’ comp cases. Once the structure is created, it cannot be altered.

Even if clients decide not to structure their settlement funds, attorneys can still structure case fees. Payments can be structured so that separate payment streams can go to individual attorneys as well as to the firm.

TIMING A FEE STRUCTURE

Timing is a critical issue.

The tax-deferred status of structured fees is the result of Childs v. C.I.R., 103 T.C. 634 (1994), aff’d without opinion, 89 F.3d 856 (11th Cir. 1996). The court said that an attorney who defers receipt of fees into future years would be taxed on the income only in the years when the income is actually received.

Since attorney fees comes out of the plaintiff’s damages, Childs requires that a fee structure agreement, showing how the fees will be paid, must be formulated before a case is complete or settled and before the attorney takes “constructive receipt” of the fee payment. If the plaintiff’s attorney receives a fee payment directly from the defendant or insurer after the case is complete, the amount would be fully taxable.

Verbiage in the settlement agreement must state that the attorney/firm is receiving fees as payment for services and detail how and when the fees will be paid. The plaintiff’s attorney, the client, as well as the opposing party, must each sign the agreement.

The time to discuss financial planning options, including a possible structure for payment of attorney’s fees, is when the case is still underway. To make sure all procedures are completed properly, attorneys should go over structured fee payout options, amounts and documentation with their tax professional and an experienced structured settlement broker.

ANNUITY SAFETY

Currently, a handful of life insurance companies write fee structured annuities. Since legal rules dictate that the underlying assets of annuities can only be invested in conservative investments—including government securities—don’t expect these assets to outperform a rising stock market. On the upside, their stability is what enables the insurance company to guarantee specific payouts through the life of the annuity, and if the proper groundwork is laid, a looming tax bill can be reduced by a significant amount.

You would think that Nobel Prize-winning economists would know how to invest their award windfall. For most, it’s the largest single sum of money they will ever receive. Yet, according to an October 11 MarketWatch article, some of these economists have “fizzled away” much of their winnings.

If the best economists in the world have trouble managing sudden large sums of cash, just imagine how an injured plaintiff, with little or no financial experience, would fair after receiving a large settlement. One economist said he splurged on clothes, travel and “lavish furnishings.” Another said a good part of his winnings went to friends and relatives who travelled with him to Stockholm to see him receive his award.

While the economists interviewed made light of their spending, for injured plaintiffs, their settlement is serious business and often critical to their family’s financial security. There must be enough money to pay for day-to-day living expenses, medical costs, college tuition and other large and small purchases. A structured settlement gives plaintiffs a specific long-term plan with guaranteed tax-free income to make sure expenses are met. The structure also removes the temptation to make impulse buys and provides the ideal excuse to say no to relatives or friends looking for a handout.

For more information about structured settlements, feel free to give me a call

-Pat

]]>http://patrickfarber.com/all/successfully-managing-sudden-cash-payout/feed/0New Videos Help Clients Understand Special Needs Trustshttp://patrickfarber.com/all/new-videos-help-clients-understand-special-needs-trusts/
http://patrickfarber.com/all/new-videos-help-clients-understand-special-needs-trusts/#respondTue, 29 Aug 2017 23:50:09 +0000http://patrickfarber.com/?p=6100Are you concerned that you may not completely understand Special Needs Trusts (SNTs) and how they can be used with government benefits? Have you ever tried to explain SNTs to clients only to wonder if they fully comprehend all the details and procedures? SNTs can be very complicated.

Are you concerned that you may not completely understand Special Needs Trusts (SNTs) and how they can be used with government benefits? Have you ever tried to explain SNTs to clients only to wonder if they fully comprehend all the details and procedures? SNTs can be very complicated.

CPT Special Needs Trusts, a non-profit trustee established to protect Medicaid and Supplemental Security Income eligibility through SNTs, have created simple, short videos that describe how SNTs work.

Each video is only about 1 1/2 minutes but they answer the most common questions associated with SNTs. Here are some of the topics:

Do I qualify for a Special Needs Trust?

Why use a Special Needs Trust?

How does my Medical Set Asides (MSAs) in my trust work?

These videos could help facilitate SNTs and MSAs discussions with your clients.

-Pat Farber

]]>http://patrickfarber.com/all/new-videos-help-clients-understand-special-needs-trusts/feed/0Structuring Attorney’s Fees: A Financial Strategyhttp://patrickfarber.com/all/structuring-attorneys-fees-financial-strategy/
http://patrickfarber.com/all/structuring-attorneys-fees-financial-strategy/#respondTue, 27 Jun 2017 21:37:37 +0000http://patrickfarber.com/?p=6082You’ve just won a big case for your client and you are anticipating a sizable fee for your good work. The question becomes: how do you best manage this income? If you are like most attorneys, the temptation is to add it to the firm’s bank account and think about what to do with it [...]]]>You’ve just won a big case for your client and you are anticipating a sizable fee for your good work. The question becomes: how do you best manage this income? If you are like most attorneys, the temptation is to add it to the firm’s bank account and think about what to do with it later. There is another option that may be more prudent—structuring your fees.

Here’s a link to an article I prepared for the Orange County Bar Association’s Orange County Lawyer. It discusses the steps and benefits of structuring attorney’s fees. I hope you find it helpful.

– Pat Farber

]]>http://patrickfarber.com/all/structuring-attorneys-fees-financial-strategy/feed/0Fed Raises Interest Rates Again; More Increases On The Wayhttp://patrickfarber.com/all/fed-raises-interest-rates-increases-way/
http://patrickfarber.com/all/fed-raises-interest-rates-increases-way/#respondMon, 19 Jun 2017 18:33:03 +0000http://patrickfarber.com/?p=6069Despite tepid inflation, the Federal Reserve raised the short-term lending rate by a quarter-percentage point on June 14, the third increase in just six months. The Fed indicated that one more rate increase is on its way this year. Here’s a good analysis from Bloomberg Markets of what lies ahead.

]]>Despite tepid inflation, the Federal Reserve raised the short-term lending rate by a quarter-percentage point on June 14, the third increase in just six months. The Fed indicated that one more rate increase is on its way this year. Here’s a good analysis from Bloomberg Markets of what lies ahead.

]]>http://patrickfarber.com/all/fed-raises-interest-rates-increases-way/feed/0Timeline for a Structurehttp://patrickfarber.com/all/timeline-for-a-structure/
http://patrickfarber.com/all/timeline-for-a-structure/#respondThu, 01 Jun 2017 16:55:02 +0000http://patrickfarber.com/?p=6061With structured settlements, timing is everything. Wait until a settlement agreement is signed, and the opportunity is off the table. Here’s a simple structured settlement timeline. Settlement Negotiations:

During settlement negotiations, plaintiff and defendant attorneys estimate such costs as the injured party’s ongoing medical care and living and family needs (i.e., possible future medical [...]]]>

With structured settlements, timing is everything. Wait until a settlement agreement is signed, and the opportunity is off the table. Here’s a simple structured settlement timeline.

Settlement Negotiations:

During settlement negotiations, plaintiff and defendant attorneys estimate such costs as the injured party’s ongoing medical care and living and family needs (i.e., possible future medical treatment, in-home nursing expenses, college tuition for dependent children, adjustments to living quarters).

A Settlement is Reached:

Both parties agree to a settlement amount (a combination of cash and annuity payments) to compensate for the damages incurred by the injured party.

Client Discussion:

Once the settlement amount is determined, a discussion with your client should have taken place abut how the client will receive compensation: an upfront lump sum, monthly payments, future lump sum payments at specific dates–or a combination of all three. It is at this time that other issues be considered including tax planning, inflation protection options and the client’s overall financial experience and personal spending habits.

Setting Up the Structure:

When the client decides on a structured settlement, the defendant (or its insurance company) and the court (if the client is a minor or is declared incompetent) agree to the settlement plan. The defendant funds the obligation by purchasing an annuity from a high-rated insurance company. This insurance carrier or “assignee” then takes over the liability from the defendant and begins making payments to the injured party as directed in the settlement agreement.

Of course, a lot more goes into creating a structured settlement than outlined above. Please call me with any questions. Thanks.

Atlas Settlement Group has compiled answers to a list of MSA questions frequently asked by clients. These 12 questions and answers provide a clear understanding of MSAs.

They start with the basic “Why are MSAs necessary?”

“The purpose of the Medicare Set-Aside [...]]]>

By far, the most complicated aspect of a structured settlement involves Medicare-Set-Asides (MSAs).

Atlas Settlement Group has compiled answers to a list of MSA questions frequently asked by clients. These 12 questions and answers provide a clear understanding of MSAs.

They start with the basic “Why are MSAs necessary?”

“The purpose of the Medicare Set-Aside arrangement (MSA) is to provide funds to the injured party to pay for future medical expenses that would otherwise be covered by Medicare, known as ‘qualified medical expenses.’ If the injured party incurs qualified medical expenses that exhaust the anticipated set-aside sum, Medicare will pay for allowable expenses in excess of the properly exhausted MSA funds. By establishing a Medicare Set-Aside Account, parties to a settlement are protecting Medicare’s interest and complying with the Medicare Secondary Payer Act.”

The Atlas MSA page is a quick and easy resource for clients and attorneys alike. Check it out at Medicare Set-Aside FAQs. For further information about MSAs, please feel free to contact me or give me a call.

– Pat

]]>http://patrickfarber.com/all/medicare-set-aside-faqs/feed/0MetLife Introduces Periodic Payment Agreement for Non-Qualified Personal Injury Caseshttp://patrickfarber.com/all/metlife-introduces-periodic-payment-agreement-non-qualified-personal-injury-cases/
http://patrickfarber.com/all/metlife-introduces-periodic-payment-agreement-non-qualified-personal-injury-cases/#respondTue, 28 Mar 2017 17:48:16 +0000http://patrickfarber.com/?p=6023Last year, MetLife introduced its new Periodic Payment Agreement (PPA). The PPA is a non-qualified product that enables the transfer of future periodic payments from physical injury cases that currently do not qualify under IRC Section 130, such as pre-1997 workers compensation settlements and the settlements of disability coverage disputes. The transfer is made to [...]]]>Last year, MetLife introduced its new Periodic Payment Agreement (PPA). The PPA is a non-qualified product that enables the transfer of future periodic payments from physical injury cases that currently do not qualify under IRC Section 130, such as pre-1997 workers compensation settlements and the settlements of disability coverage disputes. The transfer is made to MetLife Tower Resources Group (MTRG), which functions as the owner.

As you may recall, several months ago we featured a similar product through Liberty Life and its Barbados-based partner BARCO Assignments, Ltd. The primary difference between MetLife’s PPA and BARCO is that with MetLife, attorneys deal directly with a U.S.-based insurance company as MTRG is not an offshore entity.

Advantages of MetLife’s PPA include:

U.S. owner

Annuity payments grow with interest and are tax-free until withdrawn

Mortality liability and payment risk transferred from defendant/insurer to MetLife

Reduces the administrative paperwork for administering the periodic payments

]]>http://patrickfarber.com/all/metlife-introduces-periodic-payment-agreement-non-qualified-personal-injury-cases/feed/0Help Is Here for Managing Medicare Set-Aside Funds | CareGuardhttp://patrickfarber.com/all/help-managing-medical-set-asides-careguard/
http://patrickfarber.com/all/help-managing-medical-set-asides-careguard/#respondWed, 22 Feb 2017 01:17:53 +0000http://patrickfarber.com/?p=6001If an injured party qualifies for Medicare (must be 65 or older) or will qualify for Medicare within two years, a portion of the settlement must be set aside, separate from other settlement moneys, to pay for future medical bills incurred because of the injury or illness. By law, these Medicare Set-Aside accounts (MSAs) have to pay medical expenses first and be depleted before Medicare will pay for any additional expenses.

The second choice is one that I suggest to clients—professionally managed MSA accounts. For a flat, one-time fee, CareGuard, for example, will administer the injured party’s MSA funds to pay for medical expenses for the life of the MSA. CareGuard coordinates medical care and costs with the injured party’s insurance company and has the ability to negotiate medical and prescription discounts. Just as importantly, it makes sure all MSA government reporting requirements are fulfilled.

Trying to abide by the sometimes confusing MSA rules while recovering from an injury can be an overwhelming experience. That’s why companies such as CareGuard provide a valuable service. CareGuard has recently taken it one step further. It just introduced another program called Amethyst to manage and pay non-MSA medical costs from settlement funds outside MSA accounts.

I would be happy to answer any questions you have about managed MSA accounts. I can also arrange a 1/2 hour meeting with you, a CareGuard representative and myself to go over the process.

– Pat

]]>http://patrickfarber.com/all/help-managing-medical-set-asides-careguard/feed/0How Higher Interest Rates Can Be Factored Into Structured Settlement Paymentshttp://patrickfarber.com/all/higher-interest-rates-can-factored-structured-settlement-payments/
http://patrickfarber.com/all/higher-interest-rates-can-factored-structured-settlement-payments/#respondThu, 02 Feb 2017 23:43:46 +0000http://patrickfarber.com/?p=5993 This week, the Federal Reserve decided not to raise short-term interest rates, but forecasters are expecting the Fed to boost rates two more times this year after already raising rates by 0.25 percent in December (only the second rate increase in a decade). Plaintiffs considering a structured settlement may be concerned they may [...]]]> This week, the Federal Reserve decided not to raise short-term interest rates, but forecasters are expecting the Fed to boost rates two more times this year after already raising rates by 0.25 percent in December (only the second rate increase in a decade). Plaintiffs considering a structured settlement may be concerned they may miss out on higher returns on their settlement funds if they lock in structured annuity payments now at today’s lower rates.

Fortunately, there are solutions. Current annuities can be structured so that payments increase over time to account for inflation–typically at a fixed increase of two to three percent annually for the life of the annuity.

Each option provides its own unique features. While structured settlements give injured plaintiffs guaranteed income for 10, 20, 30 years or more, it is up to the plaintiffs legal counsel and structured settlement broker to design an annuity payment plan that will be sufficient for a secure financial future.

Please call me with any questions.

-Pat

]]>http://patrickfarber.com/all/higher-interest-rates-can-factored-structured-settlement-payments/feed/0Structuring Non-Personal Injury Settlements through Liberty Lifehttp://patrickfarber.com/all/structuring-non-personal-injury-settlements-through-liberty-life/
http://patrickfarber.com/all/structuring-non-personal-injury-settlements-through-liberty-life/#respondWed, 16 Nov 2016 23:31:39 +0000http://patrickfarber.com/?p=5968As you’re aware, structured settlements are commonly utilized to help resolve physical injury tort and workers compensation claims. Claimants are often better served by receiving a guarantee of future periodic payments to meet their planned and unplanned needs than by receiving a lump sum cash payment, which may be dissipated prematurely.

When the parties agree to a structured settlement, the insurer or defendant assigns its obligation to make future periodic payments to a third party assignment company in exchange for consideration. In doing so, the insurer or defendant is released of any liability for future payments.

In cases of personal injury and workmen’s compensation, the IRS facilitates this transaction by allowing the assignment company to exclude the consideration paid to it from gross income. In cases other than workmen’s compensation or personal injury, however, e.g., employment disputes, breach of contract, etc., a U.S. assignee faces tax liability in connection with the consideration paid to it for the assignment. The assignee would be required to pay income tax on the consideration received, which makes the transaction financially impractical.

In June 1999, Liberty Life Assurance Company of Boston (Liberty Life), based in Boston MA, developed its program to begin working with BARCO Assignments, Ltd. (BARCO). BARCO is a Foreign Financial Institution domiciled in St. Michael, Barbados. This exclusive partnership was formed when it was recognized that there are claimants with damages seeking to utilize structured settlements in disputes involving damages other than personal injury and workmen’s compensation. BARCO is not subject to the U.S. tax code and, pursuant to the U.S./Barbados tax treaty, may accept consideration for the assignment of taxable settlements without facing U.S. tax liability.

To fund the obligation assigned to it by the defendant or insurer, BARCO purchases an annuity from Liberty Life. Liberty Life provides a financial commitment in support of BARCO’s obligations. Liberty Life’s financial strength backs all of its obligations to pay claims under the policies it issues, and in addition, Liberty Life’s ability to pay those claims is backed by a written guarantee from Liberty Mutual Insurance Company.

The program has grown consistently since 1999 and has successfully supported nearly 10,000 non-qualified structured settlements totaling more than $1 billion. Further, it has provided a settlement solution for more than 20 Fortune 500 companies across various industry sectors.

Additional information regarding BARCO can be found at www.barco.bb. Here is a letter from BARCO outlining its history, business activities, exclusive partnership with Liberty Life, annual auditing procedures and registration with the Internal Revenue Service.

Thank you to Liberty Life for providing the above information. Remember, payments from annuities for non-personal injury claimants are tax deferred, not tax-free.

A structured settlement can offer financial protection for a lifetime as compared to a lump-sum cash settlement

When someone suffers a minor physical injury and a settlement is reached, the settlement funds offer important, temporary financial peace of mind until the injured individual can resume normal activities. However, when a catastrophic injury occurs – one that requires ongoing medical and personal care – the settlement takes on an even more vital role. The settlement must last a lifetime so that the injured individual receives proper medical treatment and can lead as normal a life as physically and emotionally possible.

Each catastrophic-injury case is different, but there are similarities that are the basis for determining the type of structured settlement to create.

Catastrophic injury structures for minors

A 16-year-old teen was practicing for a motocross race on a racetrack. He slammed the front tire of his dirt bike into a hidden rock. The crash severed his spinal cord and he became paralyzed below the chest. His racing career was cut short and he now spends his time in a wheelchair.

In the case of this young teenager, financial questions about schooling, work, mobility and long-term medical needs come into play. Judges typically require structured settlements for injured minors because the money can be designated for specific medical requirements or living expenses throughout the young person’s life. And most importantly, the money can’t be spent unwisely.

With a structure, the teenager can be assured he will receive guaranteed income for life. This is important, because it means he will have the funds for future lifetime attendant care, to retrofit a car so he can drive or a home to accommodate his disability. He will have money to pay for health-related expenditures and for most anything else that arises in his life – long after his parents are no longer able to care for him.

If the teenager’s parents had insisted on taking a lump sum settlement and the judge agreed, not only would any interest earned on the money be immediately taxable (structured settlement payments paid over time are state and federal tax free), but there is no guarantee that the money will always be there for the injured party for the rest of his life. Even the best-intentioned parent or soon-to-be adult plaintiff can be swayed to put the settlement funds into “can’t miss” investment deals that promise large returns but often end up in disaster.

Structured settlement funds are placed in annuities that invest in safe investments including Treasury securities. While returns on the underlying investments are at low levels, once state and federal tax-free status is factored in, the returns are comparable to most current safe and secure taxable securities.

Structure for a teenager

The structured settlement for the teenage boy in the above example could look something like this. The family settles with the racetrack owners for $3 million. The teen will receive $1.5 million up front to pay for medical costs, fees, a retrofitted car and tuition since college is just on the horizon. He will then receive $8,000 a month for life from an annuity where the remaining $1.5 million of the settlement is placed. Since the funds in the annuity compound tax free, the actual amount the teenager would receive over his expected life span would accumulate to $4.3 million.

Catastrophic injury settlements for adults with dependents

For adults who are catastrophically injured and who have dependents, other issues must be considered. For example, a married 52-year-old father of three underwent surgery to repair an abdominal aortic aneurysm. After the patient’s transfer out of ICU, he was not regularly monitored as was mandatory. As a result, he could not breathe and suffered respiratory arrest and heart failure. The patient was revived but suffered catastrophic brain damage. His medical care, his loss of income and his family’s current and future living expenses needed to be taken into account. In this case, the medical malpractice lawsuit was settled for $3.251 million. His insurance paid for the initial medical bills but an additional $200,000 in cash up front was necessary to pay for added therapy and early in-home personal care. He will receive $10,000 a month for life to compensate for his family’s loss of income, increasing at a 3 percent rate to factor in inflation. The money will compound tax-free over the years for an expected lifetime yield of $6.2 million. The money will also go to pay for future medical treatment and other out-of- pocket expenses.

A settlement can also be designed so if the injured party passes away within a “guaranteed” period, payments will be transferred to named beneficiaries who will receive payments during that guaranteed time frame. As with other structured settlement arrangements, beneficiary designations need to be included in the initial structured settlement paperwork – before any funds are distributed.

Catastrophic injury settlements for older adults

Some may think that older catastrophically injured individuals (usually over age 65) do not need a structured settlement. After all, their life expectancy and earning power are such that the structure’s attractive tax and long-term planning benefits do not hold the same value as they would for someone younger. Older individuals may, however, need the protective benefits from a structured settlement. The structure protects the plaintiff ’s settlement funds from unscrupulous friends or relatives and eliminates the temptation to place the money in speculative investments that are not guaranteed.

Determining life expectancy

Life expectancy plays a big role in establishing damages when settling catastrophic injury cases. Determining life expectancy begins with the Social Security Actuarial Life Tables or the U.S. National Center for Health Statistics.

The tables list people by age, gender and race. Settlements are calculated using life expectancy when the settlement funds have to pay for expenses throughout the injured party’s life.

Because injuries are so severe, damages are often calculated factoring in a shortened life expectancy. If the client must undergo surgeries or treatments, mortality rates and long-term complications from these procedures are a factor. A traumatic brain injury due to an accident or severe cerebral palsy as a result of an unhealthy delivery can significantly reduce life expectancy. Medical evaluations of the client help determine quality of life and life expectancy estimates. Understanding the long-term implications of an injury (including future treatments and surgeries) will help develop a structured settlement that addresses these issues.

Another matter to consider when negotiating a settlement: Life expectancy is often dictated by the amount of the settlement. For example, a settlement that enables a 20-year-old with brain damage to hire a nurse for assistance will usually result in a longer life for the young man versus a smaller settlement that does not make it possible for proper medical supervision and assistance.

Creating a life-care plan

Estimating the medical and daily living expenses of a catastrophically injured person can be a daunting task. Typically, a life-care plan is designed to project the medical and living expenditures over the estimated life span of the injured individual. If equipment (i.e., wheelchair, adjustable homecare bed, ventilator) is necessary, equipment costs, maintenance and replacement schedules are part of the estimates.

For example, an infant was born with cerebral palsy after a prolapsed umbilical cord was detected and an emergency cesarean section procedure was delayed. The parents sued the hospital and doctors and their attorney began negotiating a settlement with the defendants’ insurance companies. The infant would suffer from seizures, speech impairment and be wheelchair bound. She would always be dependent on others for daily living. As part of the settlement process, a life-care plan was prepared by an independent specialist that outlined the type of treatment the injured child would need throughout her life including how often, who would provide the treatment and the estimated cost. The detailed account included everything from adaptive toys until the child turned 14, to regular checkups, CT scans and EEGs, to the estimated number of trips to the emergency room.

The life-care plan specialist is brought into the settlement negotiations early on to help determine cost of care so the proper amount of funds is reserved for all current and anticipated expenses.

Government payment protection using Medicare set asides and special needs trusts

Severely injured parties can still be eligible for Medi-Cal benefits while receiving structured settlement payments. Federal law permits “individual” and “pooled” Special Needs Trusts (SNTs) to hold assets including structured settlement proceeds of injured parties up to age 65 for individual SNTs and any age for pooled SNTs while preserving their needs-based public benefits such as California Medi-Cal and Supplemental Security Income (SSI). The settlement funds are irrevocably assigned through a structured settlement to the trust and therefore are not countable as an asset for needs-based benefit eligibility.

A pooled SNT (master trust) is approved and reviewed by the Social Security Administration (SSA). Pooled SNTs are not taxed at traditional tax rates. Pooled SNTs are taxed based on the plaintiff ’s Maximum Adjusted Gross Income (MAGI). When a pooled SNT is combined with a structured settlement, minimal taxes and trust administration fees are incurred for the life of the trust.

The aggregate savings to the plaintiff are substantial. Pooled SNTs are established and administered by a charity or non- profit association. A pooled SNT is the only type of SNT available to people age 65 or older (although it can be used at any age). To qualify for an SNT arrangement, the client must be totally and permanently disabled, unable to work and is receiving or is qualified to receive SSI, traditional Medi-Cal or in-home support services. The aggregate value of medical coverage, tax-free income from SSI and in-home support services can approach $5,000 per month in benefits to the plaintiff.

For example, a 66-year-old injured male who is eligible for Medi-Cal due to a severe injury or disability would lose Medi-Cal benefits if he receives a litigation recovery. Medi-Cal resource limits are $2,000 for an individual and $3,000 for a couple. Also, just spending down the funds does not necessarily mean the plaintiff can reapply. There is a three-year federal lookback period in California, (five years in most other states), which means asset transfers can create an ineligibility period. Fortunately, an injured party of any age or settlement amount can place structured settlement assets into a pooled SNT to preserve government benefits while receiving income from the settlement for medical needs. The trust can pay for private insurance premiums while able, but could use Medi-Cal once funds dwindle.

If plaintiffs have Medicare, a Medicare Set Aside Arrangement (MSA) is a countable asset if not held in a trust. If an MSA were held in an SNT, the assets would not endanger Medi-Cal or SSI benefits. When setting up a structured settlement involving an SNT with an MSA, advisors must be aware of federal and state requirements and follow them to the letter so not to forfeit the client’s ability to access government benefits. In addition, notice of the trust must be provided to the applicable state agency to avoid a suspension of benefits.

Educating the client

While it is important to educate the defense on the long lasting financial effects of a catastrophic injury to a client, we cannot forget to educate one very important person: the client.

Before settling any case, plaintiff ’s attorneys should sit down with clients to explain their new financial realities and available options to ensure that their current and future financial needs are met. Sometimes it is a Special Needs Trust. Sometimes it is separate annuities. Without a structured payment plan, personal injury litigants can quickly burn through their money. Consider enlisting a financial advisor to discuss settlement options with clients. If the clients still decide to receive a lump sum payment instead of a structured settlement, ask that the plaintiffs sign a document stating that they received financial counsel and understand the possible financial pitfalls of taking settlement proceeds in a lump sum payout.

Settlement negotiations in a catastrophic injury case is the primary opportunity to ensure that the injured party and family have the financial means to live as normal a life as possible after a devastating, life-altering tragedy. Negotiating these kinds of cases is difficult and painful for all parties involved.

A structured settlement is the means to guarantee that in 10, 20, 30 years or more, the settlement funds will still be working for them and their future will remain financially secure.

Robert T. Simon is co-founder of the Simon Law Group and acts as the primary trial attorney. He has received numerous recognitions including the 2015 Trial Lawyer of the Year in San Diego; 2014 Los Angeles Top Trial Lawyer under 40; and 2014 Orange County Trial Lawyer of the Year – Young Gun. Since 2012, Simon has successfully tried over 20 cases to verdict and negotiated many large verdicts. robert@thesimonlawgroup.com.

Patrick Farber is a structured settlements broker with Atlas Settlement Group in Southern California. He works with attorneys throughout the country to create structured settlement annuities for physical and non-physical injury cases. He provides support and advice during all phases of the settlement process – at no cost to attorney or client. pat@patfarber.com.

William E. Lindahl, MBA, CLPF is the national enrollment director for CPT Special Needs Trusts providing pooled trusts. He is a California Licensed Professional Fiduciary with 25 years of experience meeting the needs of the disabled. He has developed Pooled Trust programs nationwide and online trust administration systems. will@snthelp.com.

Trent Richardson had it all in 2012—third overall pick of the Cleveland Browns and a $20.5 million guaranteed contract. In four short years, he’s out of the NFL and leading a “humbling” life when it comes to his finances. Like many former NFL players who were suddenly flush with cash at the start of their careers, he soon found that friends, family and hangers-on sucked him dry. The same can happen to plaintiffs in personal injury cases. Sizable settlements are seen as easy money to unscrupulous friends and family.

As an attorney who represents personal injury clients, don’t pass up the opportunity to have your clients sit down with a structured settlement broker to discuss payout options. Broker services—from initial discussions to final settlement paperwork—is provided at no cost to you or your client.

If you enlist the help of a life care planner to assess your client’s injuries and estimate future medical costs, the structured settlement broker works with the planner to ensure the injured individual has the funds for medical care and that his or her family is financially secure.

The goal is to create a plan that will help provide resources to improve your client’s quality of life and protect the family’s financial assets. Unlike professional athletes such as Richardson, your client is then in a much better position to say “no” to some of the temptations that may arise.